Commodity Rally Halts: Base Metals Plunge, Copper & Nickel Tumble, Crude Oil Slides for 3rd Day
On Wednesday's closing, base metals fell across the board, with copper and nickel taking a significant hit. Specifically, LME copper futures closed down by $440, a 4.05% decrease, at $10,419 per ton, marking the largest single-day drop so far this year.
New York copper futures, which had set a record high for three consecutive days, experienced a sharp decline, with COMEX July copper futures closing down by 5.04% at $4.8485 per pound. After the U.S. stock market closed, it fell below $4.7920, with a nearly 6.2% drop during the day.
Additionally, LME nickel futures closed down by $938, a drop of over 4.40%, at $20,366 per ton; LME aluminum futures closed down by $89, a decrease of approximately 3.12%; LME zinc futures closed down by $77, a 2.63% decrease; LME lead futures closed down by $22, a 3.12% decrease; LME tin futures closed down by $814, a 2.15% decrease.
Analysts point to several possible reasons for the copper price plunge. First, after copper prices hit new highs, investors began to take profits. IG's Chief Market Analyst, Chris Beauchamp, noted that investment funds have poured into the copper market in the past few months and have achieved good returns, but now they are starting to gradually take profits.
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Analysts from Commerzbank stated in a report that although copper prices touched a historical high of around $11,100 per ton on Monday, there was no clear incentive for the price increase. Although the market explained the rise in copper prices with reasons such as long-term supply concerns and expected demand growth, these factors are not new and are not sufficient to support such a large-scale increase in copper prices.
Second, copper production in Peru in 2024 may increase. On Wednesday evening, Victor Gobitz, the head of the Peruvian Mining and Energy Society (SNMPE), stated that the current surge in copper prices to historical highs will encourage Peruvian mining companies to take measures to address bottlenecks in production. These efforts could potentially increase marginal mine production by 5% to 10%.
Nevertheless, Gobitz prefers a conservative estimate, expecting copper production in 2024 to reach 2.8 million tons, a figure that already sets a historical record.
Third, the decline in copper prices may also be related to recent weak copper demand. Analysis indicates that despite tight ore supply in China and low processing volumes in the country's large refining industry, as the world's largest consumer of copper, China's import demand remains sluggish. This has led to copper inventory levels climbing to a four-year high, the first time since records began in 2017. Moreover, the copper delivery prices in bonded warehouses are significantly lower than the London Metal Exchange (LME) pricing, reflecting weak physical demand.Despite this, copper prices have still achieved a nearly 22% increase so far this year, primarily due to speculators betting that copper will become more important in the future as the wave of electrification drives the demand for copper. This is seen across various sectors such as electric vehicles, artificial intelligence-supported data centers, and the expansion of power grid facilities to meet surging electricity demands, all of which are accelerating globally. Additionally, the Chinese government has recently introduced policies to support the economy, leading to expectations of increased copper demand in China.
Jeff Currie, who served as the head of the commodity research department at Goldman Sachs for nearly 30 years and is now the Chief Strategy Officer of the Energy Pathways team at the Carlyle Group, pointed out that despite the rise in copper prices, large companies are more inclined to expand their supply chains by acquiring other companies rather than developing new mining projects, due to the high costs associated with new mine investments. For instance, BHP Billiton wants to acquire the copper mines held by Anglo American to increase its own copper production and become the world's largest copper producer.
The Federal Reserve's delayed rate cut expectations lead to a three-day drop in oil prices.
In the early hours of Thursday Beijing time, the Federal Reserve released the minutes of the FOMC meeting. The results showed that the Federal Reserve lacks confidence in the progress of inflation, and Federal Reserve officials expect that rate cuts will need to wait for a longer period, with several policymakers even considering further rate hikes once inflation risks reignite.
The hawkish Federal Reserve minutes dampened market expectations for rate cuts, with Goldman Sachs CEO Solomon directly predicting that the Federal Reserve will not cut rates in 2024. As a result, the US dollar strengthened, US stock market losses expanded, and crude oil prices fell accordingly.
Oil prices fell for the third consecutive trading day on Wednesday night, with a drop of more than 1%. WTI crude oil futures for July closed down $1.09, a drop of more than 1.38%, at $77.57 a barrel. Brent crude oil futures for July closed down $0.98, a drop of more than 1.18%, at $81.90 a barrel.
The main reason for the drop in oil prices is that the Federal Reserve meeting minutes indicate that the Federal Reserve may delay rate cuts due to persistent inflation. Higher interest rates mean increased borrowing costs, which can suppress economic growth and oil market demand, such as affecting consumers' demand for gasoline.
Price analyst Phil Flynn noted that the market is very focused on US gasoline demand, as there are signs that consumers are starting to cut spending due to the impact of inflation. He believes that unless this situation changes, the market outlook may be somewhat bleak.
On the other hand, data released by the US Energy Information Administration (EIA) on Wednesday showed that last week, US EIA crude oil inventories increased by 1.83 million barrels, while the market had expected a decrease of 1.92 million barrels, with the previous value being a decrease of 2.508 million barrels. Additionally, the inventory of refined oil products also increased, and the reduction in gasoline inventory was less than expected. The increase in US crude oil inventories was less than market expectations, and oil prices partially recovered some of the losses earlier in the session.
Furthermore, from a geopolitical perspective, the risk premium brought by tensions in the Middle East is decreasing, providing little support for oil prices. At the same time, the news of Iranian President Ebrahim Raisi's death in a helicopter accident did not have a significant impact on the market, and the market does not believe that this will affect Iran's oil policies.Currently, the physical crude oil market remains weak, and concerns about a short-term oil shortage have diminished. This can be seen from the fact that the premium of Brent crude oil's first-month contract over the second-month contract has dropped to its lowest level since January, indicating that the market is not very optimistic about upcoming oil prices.
Looking ahead, the market's focus is on the OPEC+ meeting scheduled for June 1st. At this meeting, major oil-producing countries are expected to continue maintaining production cuts to prevent a global oil supply surplus and support oil prices.